Corporate governance and corporate social responsibility reporting: a case study of Malaysia

Corporate governance and corporate social responsibility reporting: a case study of Malaysia

Corporate social responsibility (CSR) is relatively a new concept to developing countries, hence it is less prevalent as compared to developed countries. There is growing consensus that CSR is highly contextual. The literature indicates that the concept and practices of CSR vary depending on the country, region, culture, management perspectives, and geographical and business systems. Accordingly, it can be concluded that existing CSR in developed countries cannot be employed in developing countries. The need for companies to be positively perceived by their stakeholders and to stay competitive has led to the necessity of companies to communicate their social responsibility initiatives. Loss of social confidence due to crises has also prompted companies to report on their CSR activities to enable consumers and investors to make informed choices and rational investment decisions. Various efforts have been undertaken to encourage companies to report on CSR activities. Nevertheless, the practise of CSR reporting in developing countries remains in embryonic form. Researchers propose corporate governance good practice should promote ethics, fairness, transparency and accountability which form the foundation of CSR practices.

Given the increasing importance attached to both corporate governance and CSR, this study primary objective is to investigate the effects of corporate governance practices on the extent of CSR reporting in Malaysia. Hypotheses are developed by reference to several theoretical constructs namely agency, resource dependence, neo-institutional sociology and stakeholder-agency theories. This study employs content analysis to examine the annual reports of 450 non-financial companies listed on Bursa Malaysia over the years 2008-2013. A self-constructed CSR checklist consisting of 51 CSR-related items categorised under six themes was used to measure the extent of CSR reporting in the annual reports. To determine the influence of corporate governance on CSR reporting, multiple regression analysis was utilised.

The results show that over time, companies are increasingly disclosing more information on CSR, suggesting that this area is increasingly gaining the attention of companies. The effective role played by government and regulators is seen as the likely reason for the increasing reporting trend. Theme wise, most companies are inclined towards reporting human resource information; demonstrating that
satisfying the needs of their workers is central to their success. Although on the whole the reported levels in Malaysia fall short of disclosure in developed countries and also several countries in the same region, the increasing trend appears promising. Given more time, CSR reporting levels may approach those reported in developed countries.

This study also looks at the influence of ownership structure and board of directors attributes on the level of CSR reporting in Malaysia. Specifically, it attempts to examine the effect of ownership by directors and institutions, board independence, board meeting frequency, board diversity and CEO duality on CSR reporting. Nevertheless, despite continuous government efforts to improve the practise of corporate governance among companies, this study failed to find any significant impact of board meeting frequency, board diversity and CEO duality on CSR reporting level. Meanwhile, the association between board independence and directors who are finance experts and CSR reporting are found to be industry-specific, suggestive that the environments in certain industries deter the board from increasing CSR. Interestingly, this study exhibits significant results for both ownership by directors and institutions. Shareholdings by directors prove to have negative bearing on CSR reporting due to the entrenchment effect. Institutional ownership while demonstrating a significant result, contributes to a lower reporting of CSR information. On the whole, the results imply that the prevalent dominant family ownership of companies in Malaysia is an impediment to the effective practise of CSR.

This study is significant because it is one of the first to provide empirical evidence on the effect of corporate governance mechanisms on CSR reporting in a developing country. This study provides feedback to regulators and policymakers on the effectiveness of their efforts in promoting accountability and transparency through increased CSR reporting. In addition, it also offers an overview of the effectiveness of corporate governance practices in Malaysia which should enable regulators to improve the system of corporate governance especially increasing CSR practices.